On the surface, the global economy has experienced a relatively soft landing from the upheavals of 2022-23. There are serious risks to trade, and to growth. Will they outweigh the many positive developments?
Global growth figures averaging at around 3%, with inflation in the 2-4% range, are unspectacular figures, and represent relief for many after the shocks of the 2022-23 period, when inflation touched double figures, supply chains were disrupted by conflict, and the economic world seemed to be teetering on the brink of a slump.
But while this appears to be a soft landing, there is unease about the outlook. Protectionist measures are very much on the agenda, especially if Donald Trump wins the US election.
The quarterly World Economic Outlook from the IMF, published in July, provided a concise overview of the economic dynamics of 2024 and the prospects. It shows how the headline inflation figure masks sectoral variation, with wage pressure and services sector inflation still elevated. The report records inflation having fallen, but does not project further falls, on current trends. Interest rates may fall, but they are likely to be nudged downwards, not slashed.
The return of trade disputes and import tariffs complicates the options for policy-makers. Trying to anticipate the economic outcomes of political decisions is hazardous, because of unexpected consequences and complex interplays. The US Presidential candidate Donald Trump is considering higher import tariffs for Chinese goods, and a devaluation of the dollar. China is reported to be hoarding strategically important commodities, such as grain, oil and natural gas, possible contingency against a trade war, or actual war. Imports of commodities rose 16% in volume terms in 2023.
Such policies represent a contrast from the globalising trend from approximately 2000 to the mid-2010s. In the new context, a significant development is that the influence of central banks seems to be on the wane. The orthodoxy for the past 30 years has been to use interest rates to control inflation, but this assumed fairly free trade and increasing globalisation. Inflation may be less susceptible to monetary policy. For example, the surge in inflation in 2022-3 was caused more by shocks to the supply of physical goods, than money supply. Multinational businesses have begun to build more resilience into supply chains, prioritising reliability over efficiency, but this adds to cost.
While the IMF’s perspective is enormously useful, it differs from a national analysis in that there is no single government or other agency responsible for the world’s economy. National governments will prioritise their own people and prospects for growth. Accordingly, the IMF makes a distinction between economies where inflation is subdued, and where interest rates can be eased, and those that have to remain more vigilant about inflationary pressures.
Another area of marked dissimilarity between nations is in productivity levels. The IMF notes that ‘not all factors are cyclical’ and recommends decisive policy action to enhance business dynamism, improve resource allocation and labour market policies, for example to integrate women and immigrants more fully into the workforce, a priority especially for advanced economies that have demographic pressures.
Fortunately, there are many more developments underway than policies for tariffs and other trade restrictions. Governments, investors and big businesses are investing in cleaner energy, the AI revolution promises improvements in efficiency and productivity in addition to new services. Projected growth for 2024 in the two largest non-Western economies, India and China, appears reasonably healthy, and 7% and 5% respectively. India should benefit from a large fiscal stimulus package agreed between President Modi and his new coalition government of Rs2tn ($24bn), focused on education and employment.
Enhanced digital connectivity across the world means that more people from emerging economies can engage in the global services sector – one well publicised recent example was the remote handling of visitors to a New York restaurant by staff based in the Philippines, interacting through a screen.
Separately, the influential economist Mohamed El-Erian, writing in the Financial Times, pointed to reasons for optimism. Policy has been too skewed towards financial services for the past 20 years, to some degree becoming speculative and decoupled from the productive economy, he argued. But there are signs of a move to a better balance, with investments in life sciences, artificial intelligence and sustainable energy.
The global economy is finely balanced between growth and contraction, and between international connectivity and conflict.
The author is a Qatari banker, with many years of experience in the banking sector in senior positions.
Fahad Badar
